Sales soar on the Internet

Russia became the second-largest e-commerce market in Europe in 2009. Source: PhotoXPress

Advertisers are preparing for explosive growth in Russia’s e-commerce market, which is expected to be the largest in Europe by 2019.

Russia is
poised to become the largest e-commerce market in Europe
by 2019, if it maintains its current pace of growth. In September 2011, Russia overtook Germany as the European country
with the most Internet users. There are now 50.8 million Russians online, and
in a December 2011 poll half of Russian urbanites said that they used the
Internet at least once a day.

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The growth of Russia’s online
audience combined with the country’s vast territory and underdeveloped retail
sector makes it ideal for online shopping. Websites are the simplest and
cheapest way for retailers based in Moscow
to reach the far corners of the country.

Russia became the
second-largest e-commerce market in Europe in
2009. At that time, the online marketplace was reponsible for $19 billion in
sales, according to Troika Dialog. Since then, e-commerce has been growing by
between 22 percent and 30 percent a year, and is expected to continue this pace
in 2012. That year, Data Insight estimates the market will be worth $12.6
billion.

As in other sectors Russia
will still have to work hard to overtake Germany, the European leader in
e-commerce, which had $27.5 billion in sales in 2011, according to
e-commercefacts.com, and continues to grow at 17 percent a year.

Industry investment will play a key role in achieving such high growth rates.
Marina Treshchova, CEO of Fast Lane Ventures (FLV), one of Russia’s leading tech funds, said that the first
round of venture capital (VC) money is arriving in Russia’s e-commerce sector, and
that volumes invested into the industry last year were doubled from a year
earlier.

But Russia
is still an exotic destination for most venture capitalists.

“There are few big VC funds interested in Russia,
but there is a ground swell of smaller VC based in Europe
that is much more active,” said Treshchova.

But Fast Lane has already done several deals and has 16 Internet companies
running or in development. The most successful is KupiVIP.ru which is already
the largest online shop in Russia
offering high-end goods to the emerging middle class. The company’s revenues
went grew to $120 million in only three years.

“We develop our own companies, but increasingly we are also getting other
people bringing us their companies. We give them seed capital to develop the
business, then help them to raise more financing when they get a bit bigger,”
Treshchova said.

One of her most recent deals raised $7 million from European venture funds for
Heverest.ru, an online store offering outdoor and sports equipment. The site
targets hikers, climbers and those with a disposable income who are interested
in a healthy lifestyle.

“The amount of money available from investors in Europe
is limited, but the interest is definitely growing,” Treshchova said.

The most dynamic part of the business is online advertising, where ad buys are
growing faster than in the more traditional media. Analysts at Troika Dialog
estimate the overall ad spend this year will remain flat compared to that in
2011. But within a year, they estimate that advertisers will enjoy double-digit
growth.

Estimates suggest that Internet ads should experience growth of more than 33
percent over the next few years. This growth will come at the expense of
television advertising, which will see growth slow to abour 16 percent, according
to Troika Dialog. The next big thing will be advertising on mobile platforms .
This market is just now starting to gather momentum.

“Although the level of penetration of mobile internet in Russia is currently
low, at less than 10 percent, it is growing rapidly,” said David Ferguson, an
analyst with Renaissance Capital, who added that all the major Russian firms
are now rolling out new mobile applications and services to tap this new
market.